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Why understand finance

Bridget Holmstrom - Sunday, February 08, 2015

Why do business managers need to understand their numbers

It often seems that business managers and owners are afraid of their numbers, or that they believe finance is the sole preserve of the accountant and has nothing to do with operations.  It seems to me that a business that does not encourage all employees to know and understand the business numbers is certainly missing out on a resource that can contribute towards good decisions and help avoid making bad decisions.  It is a common concern from sources of finance such as banks that the reason a business does not receive the loan that they have requested because the managers have not demonstrated an understanding of their profit and loss, balance sheet and cash flow.  It even seems as though they don't understand the difference between profit and cash.

So why understand your numbers - well to put it simply - money matters, in fact money really, really matters! Lets face it money is measured in numbers, and the success of a business is demonstrated in terms of numbers.  Numbers are unavoidable.

Understanding finance means that a business will be leaner, better managed and consequently have a significant edge over its competitors. 

It is absolutely true that managers need to focus upon the needs of their customers so that they can deliver accordingly.  But behind the scenes managers also need to focus upon:
      • improving revenue
      • reducing costs
      • caring for assets
Identifying small savings can mean that over the course of the year large savings can be made can making a significant difference to the security of the organisation.  Where there is greater financial security there is also better job security.  This is true from the biggest organisation down to the smallest organisation.  

In the hunt for financial security it is important to remember that ALL individuals are important as all decisions and actions will influence the business finances.  

However the perhaps the main reason for understanding business numbers is control, and control is a business-wide function.  Understanding the profit and loss means that you can identify where problems are occurring and when you know what is happening you can take action.  If, however, if you do not look at the accounts and do not understand what the numbers mean, then you cannot take action.

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